2015 Aareal Bank AG – Annual Report 2015 Aareal Bank AG – Annual Report 2015 | Contents 2 Management Report 3 Annual Financial Statements 53 Income Statement 53 Balance Sheet 55 Notes 58 Basis of accounting 58 Accounting and valuation principles 58 Notes to the income statement 61 Notes to the balance sheet 62 Remuneration report 83 Other disclosures 95 Executive bodies of Aareal Bank AG 104 Offices held by employees of Aareal Bank AG 108 Responsibility statement 109 Auditors’ Report 110 Report of the Supervisory Board 111 Offices 117 Financial Calendar 119 Locations/Imprint 120 Contents This report contains rounded numbers, which may result in slight differences when aggregating figures and calculating percentages. Aareal Bank AG – Annual Report 2015 | Management Report 3 Management Report Fundamental Information about the Group The Group's business model Aareal Bank AG, headquartered in Wiesbaden, Germany, is the parent company of the Group. Its shares are admitted to trading on the regulated market (Geregelter Markt) of the Frankfurt Stock Exchange, and are included in the mid-cap MDAX® index. Aareal Bank Group provides financing solutions and services, focusing on the property industry. It supports German and international clients, as a financing partner and service provider. Aareal Bank is a member of the Association of German Banks (BdB) and the Association of German Pfand- brief Banks (vdp). Aareal Bank Group’s business model comprises two segments: Structured Property Financing The Structured Property Financing segment comprises all of the property financing and refinancing activities. In this segment, Aareal Bank facilitates property projects for its domestic and international clients, and is active in this respect in Europe, North America and Asia. It offers commercial property financing solutions, especially for office buildings, hotels, retail, logistics and residential properties. The Bank‘s particular strength lies in it successfully combining local market expertise and sector-specific know-how. In addition to local experts, the Bank also has industry specialists at its disposal, to create financing packages for logistics properties, shopping centres and hotels. This enables Aareal Bank to offer tailor-made financing concepts that meet the special requirements of its national and international clients. What makes Aareal Bank special are its direct client relationships, which – in very many cases – it has maintained for many years. Aareal Bank has a broad and solid refinancing base. It has established itself as an active issuer of Pfand- briefe, which account for a major share of the Bank's long-term funding. The quality of the cover assets pools is also confirmed by the “AAA”- rating of Aareal Bank’s Pfandbrief issues. To cater to a broad investor base, Aareal Bank covers a wide range of other refinancing tools, including promissory notes and debt securities. Private placements are the focal point of the Bank's capital market activities. These are complemented by larger, public placements that are issued depending on market conditions. The Bank also generates deposits from the housing industry, which represent an important additional source of funding. Furthermore, it has recourse to institutional money market investor deposits. The success of our capital and money market activities, and the business with housing industry clients, are the results of a combination of a sustainable business model with a sound understanding of the capital markets, and the quality of the cover assets pool. Consulting/Services The Consulting/Services segment offers the housing and commercial property industries services and products for managing property portfolios and processing payment flows. Within this segment, our subsidiary Aareon AG and the Bank's Housing Industry division work together closely. We operate the IT systems consultancy and related advisory services for the housing and commercial property industries through our Aareon AG subsidiary, which looks back at almost 60 years of experience. Aareon offers its customers secure, standard-setting solutions in the areas of consultancy, software and services to optimise IT-based business processes in the digital age. Its Enterprise Resource Planning (ERP) systems, which are tailored to meet the requirements of the respective target market may be supplemented by other digital solutions for process optimisation. Together, the large variety of these integrated systems constitute Aareon's digital ecosystem – the "Aareon Smart World", which links property companies with their customers, staff, and business partners, and also connects technical devices in apartments and buildings to one another. Aareon Smart World helps to re-design and optimise processes. Its applications help reduce costs; they facilitate new business models by connecting all participants, and provide more comfort in the dialogue between tenants and staff members of housing industry companies. Aareon offers software solutions – both in Germany and internationally – that can be used in a variety of operating environments: in-house, via hosted solutions, or a software-as-a-Service (SaaS), from the exclusive Aareon Cloud. Data from Aareon's Cloud Computing is held in Aareon's certified data-processing centre in Mainz, which guarantees data security and protection at the highest level. Following successful advice, Aareal Bank AG – Annual Report 2015 | Management Report 4 implementation and training, customers usually opt for a maintenance model covering regular support services. In its Housing Industry division, Aareal Bank offers its clients process optimisation, electronic banking, and facility management services, and markets its BK01 software which is the leading procedure for automated mass payments in the German housing and property industries. Thanks to BK01 being integrated into licensed accounting systems, clients in Germany are able to process their payments and account maintenance directly from the management software they use. In addition to the German housing and commercial property indus- tries, the German energy and waste disposal industries are a second major client group of the Bank's Housing Industry division. This enables the Bank to offer additional products which facilitate the collaboration of target groups across industries, with seamless digital processes helping to achieve synergies. The use of Aareal Bank's payments software products generates deposits that contribute significantly to Aareal Bank Group's refinancing base. Management system Aareal Bank Group is managed using key financial performance indicators, taking the Group's risk-bearing capacity into account. Management takes place primarily at Group level, and is additionally differentiated by business segment. Group management is based on medium-term Group planning, prepared annually, which is geared towards the Group's long-term business strategy. An extensive (management) reporting system regu- larly provides the information required for management and monitoring purposes. The indicators set out below are key financial performance indicators for Aareal Bank Group; they are used for the purposes of managing the business and the Group's profitability. • Group/consolidated Net interest income (in accordance with IFRSs) Allowance for credit losses (in accordance with IFRSs) Net commission income (in accordance with IFRSs) Administrative expenses (in accordance with IFRSs) Operating profit (in accordance with IFRSs) Return on equity (RoE; before taxes) Earnings per ordinary share (EpS) Common Equity Tier 1 ratio (CET 1 ratio) Liquidity Coverage Ratio (LCR) • Structured Property Financing segment New business Credit portfolio of Aareal Bank's core business • Consulting/Services segment Aareon's contribution to consolidated operating profit (in accordance with IFRSs) The preservation of capital and the ability to distribute dividends are additional financial performance indicators applicable to Aareal Bank AG. The Group's existing risk management system is used to manage and monitor the various risk exposures of Aareal Bank Group entities, in a centralised manner. All management-relevant information is systematically collected and analysed, to develop suitable strategies for risk management and monitoring. We also employ forecasting models for balance sheet structure, liquidity and portfolio development for strategic business and revenue planning. In addition to business-related management tools, we also use other instruments to optimise our organisation and workflows. These include comprehensive cost management, centralised management of project activities and Human Resources controlling, for example. 1 RoE before taxes = Operating profit ./. consolidated net income attributable to non-controlling interests ./. AT1 coupon Average equity (IFRS) excluding non-controlling interests, other reserves, AT1 bond, and dividends 2 EpS = Operating profit ./. income taxes ./. consolidated net income attributable to non-controlling interests ./. AT1 coupon (net) Number of ordinary shares 3 New business = newly-originated loans plus renewals Aareal Bank AG – Annual Report 2015 | Management Report 5 Structured Property Financing also deploys supplementary management tools and indicators. For example, we manage our lending business in this segment using lending policies which are specific to the relevant property type and country, and which are monitored within the scope of the lending process. The property financing portfolio as a whole is actively